Can Online Sales Drive Growth For Home Depot In The First Quarter?

Home Depot (NYSE: HD) is scheduled to report its first quarter results on May 15, wherein a substantial rise in both revenues and earnings is expected. A strong economy, as well as the benefit to be received from the tax reform, had prompted Home Depot to provide an upbeat guidance for FY 2018. Comparable same store sales growth of 5%, EPS improvement of 28%, and a dividend hike of 16% for the year are being expected by the company. The improving housing market, as a result of increasing demand for houses and appreciating prices for homes, should continue to boost HD’s revenues in the first quarter. Furthermore, hurricane-related sales will continue to positively impact the sales in the first half of FY 2018, since that is when many homeowners will receive insurance checks for damage. Moreover, the tax reform will not only improve the company’s bottom-line, but it will also result in higher disposable income for consumers, which may have a positive impact on Home Depot.

1. Continued Growth in Online Revenues: Home Depot has made a concerted effort to focus on its integrated retail strategy, which seamlessly connects online and offline channels, making its stores more efficient. This has resulted in improved revenues and profitability, with the online space being a key driver of the impressive growth Home Depot has witnessed in recent times. In FY 2017, HD implemented a new e-commerce platform, enhanced its search and mobile functionality, increased check out speed, and expanded its chat functionality to improve the customer experience with the company’s online contact centers. These efforts resulted in increased traffic and conversion, with the online sales increasing 21% in the fourth quarter and 21.5% in fiscal 2017, accounting for 6.7% of the total sales. By focusing on an integrated channel strategy, Home Depot has been able to increase revenues per square foot, rather than generating revenues from new square footage. This has ensured that its existing store network is being effectively used to drive revenues.

2. Impact of Hurricanes: The company estimates the hurricane-related sales positively impacted total company sales growth in the fourth quarter of FY 2017 by 1.7% or $380 million, which came in higher than expected, and $652 million for the second half. This benefit, of a comparable sum, is set to continue in FY 2018 as well, with a majority of it occurring in the first half of the year. However, the sale of low-margin products, as well as the roughly $66 million hurricane-related expenses, negatively impacted the gross margin, which declined 12 basis points in the fourth quarter. On the other hand, in FY 2018, the hurricane-related sales are expected to be more profitable, which should ease the pressure on the margins.

3. Effect of Tariffs On Housing Market: According to the Housing and Mortgage Market Review published by Arch MI, a leading mortgage insurance provider in the United States, the direct impact of the steel and aluminum tariffs on the housing market are expected to be “inconsequential.” As per the review, although the costs of some building construction materials will rise, the direct impact on the total cost of a new home should be relatively insignificant. This is because steel frames accounted for less than 0.5% of new single-family houses and about 4% of multifamily buildings, according to the U.S. Census Bureau estimates. On the other hand, the imposition of lumber tariffs can raise the cost of building the average new single-family home by an estimated $1,400 and each multi-family unit by roughly $500, according to the National Association of Home Builders.

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